If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Yunnan Energy New Material (SZSE:002812), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Yunnan Energy New Material is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.066 = CN¥2.4b ÷ (CN¥47b - CN¥11b) (Based on the trailing twelve months to March 2024).

Thus, Yunnan Energy New Material has an ROCE of 6.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

In the above chart we have measured Yunnan Energy New Material's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Yunnan Energy New Material .

So How Is Yunnan Energy New Material's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 506%. That being said, Yunnan Energy New Material raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Yunnan Energy New Material's earnings and if they change as a result from the capital raise.

What We Can Learn From Yunnan Energy New Material's ROCE

Bringing it all together, while we're somewhat encouraged by Yunnan Energy New Material's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last five years. Therefore based on the analysis done in this article, we don't think Yunnan Energy New Material has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Yunnan Energy New Material that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com